UK, Outsourcing, Deals, Providers

UK faces ‘outsourcing turmoil’ with £7 billion worth of deals up for renewal before 2008, says Morgan Chambers

UK businesses are facing ‘outsourcing turmoil’, with nearly £7 billion worth of outsourcing deals up for renewal by March 2008, says a new report from sourcing advisory firm, Morgan Chambers. According to the report, ‘Outsourcing Service Provider Performance 2006’, the big outsourcing providers will see their high-value contracts broken up and distributed among a number of providers in the next two years, in the biggest shake-up the industry has seen since the late 1990s.

‘Outsourcing Service Provider Performance 2006’, undertaken annually, surveyed 500 senior (‘C’) level representatives within client companies across Europe, in a number of sectors, who outsource all or part of their IT or business processes. It explores their perceptions of outsourcing providers, their satisfaction with performance and their plans for future contracts.

The report identifies a clear trend away from ‘sole source’ deals in the UK – i.e. giving the whole outsourcing contract to a single provider - towards ‘multi-sourcing’, with smaller, specialist companies picking up significant chunks of business in shorter-term contracts. The result could have a serious impact on the revenues of the big outsourcing providers, who are likely to respond by acquiring or collaborating with smaller specialists in order to keep their existing business.

On average, each UK outsourcing contract is worth in the region of £28.5 million, with the largest contract up for renewal being worth almost £900 million (a seven-year deal between AstraZeneca and IBM, which is up for renewal in February 2008). Most deals relate to the provision of IT, rather than BPO, which despite some predictions has grown at a relatively slow rate.

The service providers that have, until now, been seen as ‘offshore’ (for example, Wipro), are beginning to overtake the traditional ‘end-to-end’ providers on innovation and are starting to be considered a strategic and not a purely price-led buy (although price is still an important factor). This has led many client companies to reconsider how they outsource, and satisfaction levels are shifting away from the big US or Pan-European-based providers, who are looking increasingly vulnerable. Only 37 per cent of client companies in large contractual agreements worth more than £25 million are satisfied with what they’re getting, compared to 67 per cent satisfaction in smaller (less than £3 million) contracts.

Loyalty is virtually non-existent among client companies, with little differentiation perceived between the main providers. This adds to the uncertainty of contracts being renewed. Of the providers, Wipro and Atos Origin were the most likely to be re-contracted, but even in these cases, only 38 and 42 per cent of clients respectively said they would definitely renew.

Phil Morris, newly-appointed CEO of Morgan Chambers, says: “The outsourcing market has matured and clients are becoming smarter in the way they contract. Certain elements of outsourcing such as Infrastructure have become a commodity buy. The providers who will secure greater market share and more investment from existing clients are those who can demonstrate innovation or who can develop a long-term relationship that is supportive of the client’s business goals.

“Businesses are beginning to drop the ‘offshore’ or ‘nearshore’ labels, moving instead to ‘global sourcing’, with no geographical boundaries. This opens up the market to a new wave of providers and contracting models.

“We will see a period of consolidation in the marketplace as providers fight to keep their existing business in any way they can. Overall, the market continues to grow, but contracts will fragment, with more multi-source deals being signed.”

The report also finds that clients will have to learn to manage outsourcing contracts effectively, rather than handing responsibility to a vendor, which will change the shape of the client organization as well. More than 45 per cent of client companies in the UK (nearly 70 per cent across Europe) said that they had ‘weak’ or ‘medium’ skills available to them to manage providers.

“Effective governance is essential and is neither understood nor appropriately skilled in most client organizations,” says Morris. “Working without a proper decision framework to define policies, procedures and resources can lead to disaster. As the outsourcing market fragments, governance will become more and more important.”